How Developers Can Navigate the Liquidity Crunch

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By Kelsi Maree Borland

June 07, 2023

Most commercial real estate stakeholders expected stress in the capital markets to arrive sometime last year, as the Fed aggressively increased interest rates. As it turned out, the rate hikes were not the only thing capital markets had to deal with. The banking crisis, which began with the collapse of Silicon Valley Bank in March, has created additional challenges in securing both equity and debt.

HALL Structured Finance loan originators Bryce Yamauchi, Brian Mitchell and Allyson Van Blarcum discuss the current climate in the capital markets and how borrowers can overcome obstacles to secure funding.

Tougher Going in the Current Capital Environment But Alternatives Available

While the current capital environment is undeniably challenging, Yamauchi, Mitchell and Van Blarcum all note that they continue to originate new construction loans, primarily for hotel and multifamily projects, and bridge loans for a variety of asset types.
This is a difficult time for some developers and owners to complete and fill the capital stack for their projects, something Van Blarcum says would have been far easier six to nine months ago. But she adds “there is plenty of money out there and new development deals and refinancing are still getting done.”

“With the increase in interest rates, banks and institutional lenders are dialing back on their appetite for real estate, and in some cases, choosing not to extend or modify existing loans. We see opportunity for private capital to fill the void,” says Mitchell. “Bridge loans are an area we are really leaning into right now.”

Of course, some asset classes are better equipped to adapt to the new lending environment. According to Yamauchi, hotel operators have been able to maintain, and even increase, their net income due to their ability to adjust rates daily. Multifamily also continues to be attractive given the overall market dynamics and because leases are relatively short term, typically structured as one-year contracts with renters.

Crafting the Right Deal

“Even in a capital market environment with less alternatives, deals with the right profile can secure funding,” says Van Blarcum, adding that the three most important characteristics are the quality of the product, the geography and the sponsor’s track record. “HSF is looking to provide financing for projects in markets with good underlying fundamentals. Opportunities in the Sun Belt are particularly attractive, especially Texas.”

“A sponsor who has demonstrated the grit and determination to stick with a property is essential to securing capital in the current market. We want somebody to stand by their deal and have skin in the game,” says Van Blarcum.

“Also, the composition of the equity really makes a difference. We can lean in and be more aggressive on deals where there is fresh cash equity,” says Yamauchi.

HALL Structured Finance is pursuing a strong pipeline of new loan opportunities and is on track to achieve its targeted origination volume of $800 million this year.

“We are still actively pursuing and closing on new loan opportunities, while many of our competitors in the private lending space and institutional lenders are sitting on the sidelines,” says Mitchell.

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